Saturday, April 24, 2010

I begin this post with some trepidation. If you're really smart, I always say, you're never afraid to say "I don't know," and I certainly cannot claim to understand contemporary finance, derivatives, credit default swaps, and the rest of the new financial paraphernalia that have made multimillionaires out of Wall Street traders while bringing the world economy to it knees. Gradually certain critical facts seem to be emerging, and I am tentatively trying to put two and two together and hoping for a result that is reasonably close to four. I hope that any more knowledgeable readers will comment--we all need to know as much as can about what is happening in order to behave like informed citizens.

One doesn't hear much about Enron nowadays, but I am beginning to think that it was far more than just a brilliantly fraudulent new enterprise that came a cropper. Enron was, as I understand it, the pioneer in creating and selling energy derivatives, a form of futures contract that allowed large energy consumers to insure against swings in prices. They had many consequences. According to the excellent documentary, The Smartest Guys in the Room, Enron's instruments allowed it to drive the price of power in California through the roof in 2001, leading directly to the recall of Democrat Gray Davis and the election of Arnold Schwarznegger. Enron itself collapsed shortly thereafter and several of its executives were convicted of fraud. The Sarbanes-Oxley Act was also passed, requiring greater financial transparency, but nothing, apparently, was done to restrict or regulate trading in derivatives, which became a mainstay of the new big banks. In 2007-8, as we know know, those banks managed to bid the price of oil up to new heights--in part, presumably, by using derivatives. The price fell by nearly 100% but has now gained about half of that loss back. How much of this actually relates to supply and demand, we no longer know. I did see a report in the last two weeks--one I unfortunately failed to save--to the effect that US businesses are now forced to spend far more money on futures contracts for their energy supplies. That, to me, is an example of how our new financial institutions are become parasites on the more productive sectors of the economy that remain.

The government's suit against Goldman Sachs, which turns out to have cooperated with a hedge fund manager named Paulson (no relation to the Treasury Secretary) to bet against securities it had packaged and marketed itself, is another example of how bad things have gotten. I am intrigued that while the SEC has charged Goldman with fraud, they have not charged them with insider trading--perhaps because the insider trading laws do not apply to credit default swaps. Yet surely Goldman's actions were equivalent to those of a corporation shorting its own stock in anticipation of a bad earnings report? And surely the opportunity to float an unsound investment with the right hand, while shorting it with the left hand, is an opportunity too promising for anyone to miss? Credit default swaps are a form of insurance, but the resources of the megabanks are so enormous that they can, in effect, raise or lower the value of assets they have just chosen to insure, according to what will benefit them and their partners the most. This is even easier as long as the Federal Reserve continues allowing them to borrow at near-zero interest.

Brokers, traditionally--like bookies--are supposed to make money on every transaction while declining to gamble themselves. (The journalist Larry Merchant, author of a book on betting on football, described bookies as gamblers who had decided they would rather pay the rent.) But that tradition was destroyed by the repeal of Glass-Steagall, which allowed the big banks to trade on their own. I am beginning to think that we have turned the economy into a huge casino, one in which the house not only takes a percentage of every bet, as in the past, but also rigs the heaviest action. Other evidence is surfacing that major market players understand the game is rigged. I recently heard an interview with Harry Markopoulos, the whistle-blower who vainly warned the SEC for years that Bernie Madoff must be running a scam. He is convinced that Madoff's clients knew that he could not possibly be generating such returns within the rules and must be cheating somehow--they just didn't understand exactly how he was doing it.

The big banks have only existed in their current form for about a dozen years, and one would have to go back to the Third Reich, it seems to me, to find an institution that did so much damage in so short a time. Yet because they have not killed people, they are still standing and making nearly as much money as ever. These are the institutions which, I am convinced, we need to tame. Paul Krugman wrote tellingly yesterday that President Obama should not have said his reforms would be good for Wall Street: effective reform will indeed reduce the profits Wall Street earns, as well it should--and like Franklin Roosevelt, the President should not be afraid to say so.

All this has another, very sad dimension. Beginning in 2003, as many of you know, the late Bill Strauss and myself, together with about ten other classmates from the Harvard Class of 1969, began campaigning against the multi-million dollar bonuses paid to managers of the Harvard Endowment, which had become a hedge fund. We were not too surprised by the reaction of the financial press, which unanimously argued (as did President Lawrence Summers) that the managers had earned every penny, but we were certainly disappointed to find that many current Harvard undergraduates sided with them as well. I began to realize that our whole elite educational system had become a large funnel whose small aperture emptied annually into Wall Street. Twenty years ago, in my book Politics and War, I wrote that the cataclysm of the Napoleonic era occurred because war and diplomacy were the main spheres of activity of ambitious young men, and commented that the industrial revolution had come along just in time to provide them with a healthier outlet for society. Alas, the financial revolution has not done the same.

An army of lobbyists is now trying either to block financial reform completely (an endeavor in which the Republican Congressional leadership has joined) or to deprive it of any significant meaning. This week procedural votes in the Senate will begin and we shall find out whether the Republicans will once again unanimously follow their leaders. (Charles Grassley broke ranks in the Agriculture Committee, but without promising to vote for an eventual bill.) Yet in any case these new monsters will be very hard to slay. It took many decades to put a real dent in the power of the huge corporations that emerged from the Gilded Age, and it has taken about 30 years to undo the work of the New Deal and (in some respects) the Progressive Era. If President Obama manages to reverse the trend, he will have done well.

Saturday, April 17, 2010

Carl von Clausewitz's concept of military genius--the quality which in his opinion distinguished the greatest battlefield commanders--is really a more academic version of Kipling's poem If, which I gave framed copies of to both of my sons when they went off to college. The battlefield is a chaotic place as well as a very dangerous one, and the commander is invariably deluged with information and conflicting advice. A military genius knows instinctively how to distinguish the significant information from the insignificant, to know when to stick to his original plan and when to modify it, rather than to give way to momentary floods of joy or despair. Political leadership demands the same qualities, particularly in times of crisis like those in which we live. Lincoln, FDR, Eisenhower (not surprisingly), and Kennedy had those qualities; George W. Bush did not, and continually took refuge in certainty rather than take in any data at all. It is becoming clear that Barack Obama has them too. Were I to reread my posts over the last eight months or so, I would probably conclude that I need to work on them a bit more myself.

The most confusing picture of our political scene is the ceaseless drumbeat of hysterical abuse the President has to endure. With the major media now divided almost entirely into those who try to maintain at least a pretense of objectivity (like the major newspapers and networks) and those who have become completely partisan like Fox News, the negative voices, like the Confederate bombardment before Pickett's charge at Gettysburg (to which the Union artillery commander wisely decided not to reply), seem like the only game in town. Meanwhile, the actually correlation of forces remains very precariously balanced. Lacking a real liberal majority, the Democrats had to compromise key aspects of the health care bill all last year, and make a futile attempt to secure Republican support. Then came the catastrophe of the Massachusetts election, which I, like just about everyone else, took too seriously. The next day, Rush Limbaugh, speaking through one of his parody artists who channeled the President, declared it "the day that health care died." But he was wrong.

To understand the passage of the bill, we can usefully cite another great military theorist, the ancient Chinese Sun Tzu. "Men fight best on death ground," he wrote. "Put your own men on death ground." After they got over the initial shock of Brown's victory, the White House (above all, it seems, the President himself) and Congressional Democrats realized they simply could not afford this defeat. They made the necessary compromises, decided to use reconciliation, and emerged with the most significant piece of social legislation in 45 years. That was only the beginning, but it reversed the momentum.

Yet the Tea Party, if one focuses upon the media, still dominates the battlefield. . .or does it? This week the New York Timesand CBS published the results of a poll of tea partiers. They found, to begin with, that they do not represent a broad-based movement, but rather one well-to-do, white, and largely older faction of the Republican Party--a shrinking demographic, both absolutely and relatively. Their views are very different from those of other white folks, especially on the other side of the political aisle.

No one can read those figures without concluding that the Tea Party is an extremist movement within the Republican Party, one dominated by total hostility to the President and characterized by high levels of racial and economic resentment. I was delighted to see that only tiny numbers of white independents and Democrats could swallow the ridiculous idea that Obama's policies are favoring black and poor Americans, which they obviously are not. The Tea Partiers almost unanimously buy the even more ridiculous accusation that he is moving us towards socialism--the same accusation constantly leveled against Franklin Roosevelt, who also saved capitalism from its own excesses, just as Obama has done. There is, however, an interesting omission in the Times poll results. They do not give the total statistical breakdown between white Tea Partiers, other white Republicans, white independents, and white Democrats. The most recent data I can find with a quick search are two years old: collected by the Pew Research Center, they show white people almost evenly divided into Republicans, independents, and Democrats. If that is still true, then less than half of white voters think Obama is moving the country towards socialism, or that giving people benefits encourages them to remain poor, and more than half of white voters think President Obama shares their values. None of this suggests that the Tea Party will contribute anything positive to the Republican cause in November, or that the extreme right-wing candidates contending for Republican nominations in Florida, Arizona, and elsewhere will face very strong prospects.

Let me say once again that those of us who expected Obama to replay the first two years of the New Deal were very naive. Neither his majorities, nor the depth of our economic crisis, justified such hopes. Nor can he draw on a cadre of activist experts, cabinet members, etc., dedicated to new economic policies. In any case, we should all understand by now that the process of restoring the proper role of the government and enforcing a reasonable degree of economic equality is going to take a very long time. In the meantime, the Republican Party is becoming its own worst enemy. Having failed to defeat health care with an all-out assault, it is now prepared to try the same strategy against financial reform--which is obviously a far more popular cause among the American people than health care reform was. Mitch McConnell is gambling that every Republican in the Senate will buy the lie that the Democrats' bill is designed to promote further bailouts--or that the country will go along if they do. He is surely wrong on the second count, in my opinion, and he may well be wrong on the first.

The Administration is also pursuing a long-term strategy abroad. The news from Afghanistan is worse than ever, but the nuclear summit and the arms control treaty with Russia were important steps towards a very different world, and very gratifying to this particular historian, who has been calling for such steps here for years. The Republicans are threatening to oppose the treaty as well--the exact step which turned their hero Barry Goldwater into a fringe candidate in 1964, after he railed against the Test Ban Treaty with the Soviets. The Administration has also made clear to Israel and the world that the policy enunciated by George W. Bush in his first Administration--that Israel will keep whatever land it wants in a peace treaty--no longer obtains. That will not magically open the door to peace but it will promote more debate in Israel.

Our new civil war is a peaceful one, for which we should be thankful. Had Lincoln in 1861 or 1862 been able to tell the northern people just how much the war was going to cost and how long it was going to last, he probably could not have secured their support. Because young people are not dying by the thousands, however, we can be more honest. We are slowly trying to undo the orthodoxy of the last thirty years, while facing an aroused and totally obstructionist Republican Party. It will take time both to develop new ways of thinking, and for the Republicans to learn the error of their ways. The President, by refusing to panic, has set a good example. Let us try to follow it.

Saturday, April 10, 2010

The retirement of John Paul Stevens marks the passing of the last truly influential member of the GI generation from our national life. There are still four GIs in the Senate (Robert Byrd, Frank Lautenberg, Daniel Inouye and Daniel Akaka), but none is playing a very prominent role in events. His retirement also reminds us of the passing of two important and related elements in American life: the centrist, responsible Republican Party, which has been dying since the day on which he was appointed to the Supreme Court by Gerald Ford, and the much-lamented, much-misunderstood consensus era of American politics of which it was a part.

Gerald Ford had an extremely undistinguished political career before Richard Nixon tapped him to succeed Spiro Agnew in 1973. An average conservative Midwestern Republican, he had, exceptionally, been elected to the House in the Democratic year of 1948, not in the great Republican sweep of two years earlier that had kicked off Nixon's career. Significantly, he became the first GI leader of the House Republicans in 1965, ousting Lost Charlie Halleck after the great Democratic sweep of 1964. He had attacked Lyndon Johnson for not having prosecuted the Vietnam war more vigorously (especially from the air) and in 1969 he had tried to impeach Justice William O. Douglas. Nixon, already threatened with impeachment, clearly chose him because he did not believe that the Congress would dare to put him into office. He was wrong.

Ford spoiled his Presidency and probably threw away his chance for election within a month of taking office when he pardoned Nixon. He may indeed have promised to do so--or at least indicated that he would give the matter thorough consideration--to Alexander Haig, Nixon's Chief of Staff, whom he then appointed to the Supreme Command of NATO, a post for which Haig was militarily unqualified. He would have done much better to allow the legal process to run its course before, perhaps, commuting any prison sentence meted out to the former President, or even covertly encouraging a plea bargain along those lines. But Ford performed an act of great statesmanship in the spring of 1975, when he refused either to intervene once again to try to save South Vietnam (as Henry Kissinger apparently contemplated doing), or to blame the Democrats for that country's defeat (as Kissinger promptly did.) It was "a war that is finished as far as America is concerned," he said, and no one complained very loudly. Meanwhile, he continued to pursue detente, and a SALT II agreement, until the pressure Ronald Reagan's campaign for his job in the spring of 1976 forced him to announce that our foreign policy was no longer detente, but rather "peace through strength." Reagan's near-victory in the campaign for the nomination was a portent of things to come.

Domestically, however, Ford was a moderate Republican in office, and he made several outstanding appointments. One was his Attorney General, Chicago attorney Edward Levi, who in turn, I believe, was responsible for the nomination of Justice Stevens. Roe v. Wade was only two years old when Ford chose him, and had not become a Republican litmus test. In Sunday's New York Times, Linda Greenhouse reports that Stevens was not asked a single question about Roe v. Wade in his confirmation hearings. (Ronald Reagan, interestingly enough, even ignored that litmus test in 1981 when he appointed Sandra Day O'Connor, much to his base's disgust.)

Stevens was nowhere near as liberal when he joined the court as he later became--but here, too, he exemplified the best of his generation. As he remarked, he learned on the job. Initially a supporter of the death penalty (which was illegal when he joined the court), he changed his mind once again and began to oppose it because he saw how capriciously it was applied. During his last 20 years of service he has helped keep alive, insofar as he could, the ideas of the Warren Court, including its protection of civil liberties and the rights of criminal defendants, and its protection of personal privacy in sexual matters, as well as the 1973 Roe v. Wade decision.

Today's pundits who continually lament the passing of an age of consensus ignore a critical point. That consensus was based upon agreed values, values initially enunciated by Franklin Roosevelt and affirmed by the sacrifice of more than 300,000 American lives in the Second World War. They included a commitment to basic economic justice for all Americans; a well-regulated capitalism; a highly progressive tax system; an end to legal and economic prejudice based on religion, national origin, or race; cheap education; an American commitment to defend freedom around the world, while carefully avoiding a new world war; and the most effective possible meritocracy. While during the 1950s and 1960s the federal government ran a deficit far more often than not, the size of those deficits was very modest by contemporary standards, and taxes on high income brackets remained very high. Intellectually they also included a commitment to rationalism and science. Socially, they were, by present-day standards, quite conservative. (It was ironically a scientific triumph, the birth control pill, that began breaking down sexual conservatism.) Republicans railed against the growth of government, but did little or nothing to stop it under Eisenhower, Nixon--or Gerald Ford.

The consensus was not universal, but the election of 1964 showed that it included 3/5 of Americans. Barry Goldwater in that year opposed a great deal of it, attacking Social Security, the TVA, the Civil Rights Act, and our fear of nuclear weapons--and received less than 40% of the vote. Yet in The Making of the President 1964, Theodore White, in the most prophetic passage he ever wrote, compared Goldwater in 1964 to William Jennings Bryan in 1896, and speculated that his campaign, however unsuccessful, might have struck chords that would evoke a response in the long run. He was right.

I am not sure that any but the very youngest Americans alive today will live to see another consensus era like that one. The crisis of 1929-45 was uniquely cataclysmic, both at home and abroad, and thus had unique results. The Civil War never created a comparable consensus, and I am inclined to believe that the crisis through which we are now passing will not either. In the last month the Obama Administration has regained critical momentum by passing the health care bill, and this week's conference on nuclear weapons may portend a real breakthrough. The President, picking up on something I pointed out here years ago, has linked the continuing disarmament of the nuclear powers with restraints upon proliferation, just as the 1969 Nonproliferation Treaty calls upon us to do. The conference also seems likely to link the question of the Iranian nuclear program to Israel's nuclear weapons--the reason that Israeli Prime Minister Netanyahu has decided not to show up. But at the same time, today's newspapers report that the Administration has given up on appointing Dawn Johnsen, a forthright critic of the Bush Administration's legal subterfuges, to head the Department of Justice's Office of Legal Counsel--a terrible step backward. The President's Supreme Court choice is also likely to face a violent confirmation fight, and quite possibly a filibuster. Bart Stupak, who accepted a reasonable compromise to pass the Health Care bill, has decided not to seek re-election. The problem we face for the next 20 years is not to create a new post-New Deal consensus: it is rather to hold the country together at all.

The ebbing of the consensus, and the passing of the world that created it, is not altogether a bad thing. Because neither the US nor any other major industrial country can mobilize armies of ten million men anymore, we cannot fight another world war. That represents enormous progress. Personal freedoms, particularly sexual ones, have made great advances. But our capacity to work together to address economic and political problems has been wounded beyond repair, and our intellectual traditions have also decayed. Neither we, nor, I suspect, our children, will be able to match our parents' and grandparents' achievements in those realms, and it will be many years before another Justice Stevens sits on the Supreme Court.

Saturday, April 03, 2010

At least three critical stories about the U.S. and Afghanistan appeared in this week's New York Times, each full of echoes from Vietnam in the critical period from 1963 to 1965. (I should mention that two weeks ago the cover article in the liberal Catholic magazine Commonweal, on Afghanistan, was written by myself. Unfortunately it is not available to anyone but subscribers and it would not be fair for me to reproduce it here.) The problem, as in Vietnam in those critical years, is that our ally--or client--simply does not share our goals.

Like Ngo Dinh Diem, Mohammed Karzai became the American hope in his nation by being in the right place in the right time. Diem in 1954 sold himself as an anti-Communist, pro-western nationalist; Karzai sold himself as an anti-Taliban, anti-Soviet, Pashtun leader. Like Diem, he became the favorite of the Americans, but has failed to broaden his base of support in the eight years since we put him in power. Like Diem, he has rigged his re-election campaign. (Diem did not allow opposition and claimed over 90% of the vote; Karzai had opposition and apparently prevailed last year with the help of widespread fraud.) Like Diem, he has a powerful brother who is suspected of corruption--in Karzai's brother's case, this involves the drug trade. Karzai's brother does not apparently have a photogenic and publicity-hungry wife, but the similarities still outweigh the differences.

None of this would matter if Karzai genuinely agreed with the United States about what is needed in Afghanistan, but evidence is mounting that he does not. Like Diem in 1963, Karzai is angry at increasing American influence (and increasing numbers of Americans) in his country. The first story in the Times last week, which appeared on Tuesday, characterized the situation well. "Neither Mr. Karzai nor his spokesman, Waheed Omar, could be reached Monday," wrote Dexter Filkins and Mark Lander. "But according to Afghan associates, Mr. Karzai recently told lunch guests at the presidential palace that he believes the Americans are in Afghanistan because they want to dominate his country and the region, and that they pose an obstacle to striking a peace deal with the Taliban. During the recent American-dominated military offensive in the town of Marja — the largest of the war — Mr. Karzai stood mostly in the shadows."

Those of you who have read my book American Tragedy will have no trouble recognizing this pattern. Ngo Dinh Diem and his brother Ngo Dinh Nhu both needed and feared American help. They consistently resented American attempts to tell them what to do, and by 1963 Nhu was complaining that there were too many Americans (abut 17,000) in Vietnam. Filkins and Lander also reported that Karzai invited Mahmoud Achmedinejad, the Iranian President, to visit Kabul, where he made a typically violent anti-American speech. Ngo Dinh Nhu was also fond of this kind of psywar, and in 1963 there were even rumors that he was negotiating with the Viet Cong. I never found any evidence that those rumors were true, but those were the days of the Cold War, when the division between the two halves of the world was nearly absolute. Karzai's invitation to Achmedinejad told us that he does not divide the world into friends and enemies along the same lines that we do.

The second point of the story--that Karzai wants peace with the Taliban--obviously also reminded me of Nhu in 1963, but it also brought to mind one of Diem and Nhu's successors, Nguyen Khanh, in 1964-5. Khanh staged the next military coup after Diem's overthrow at the end of January 1964, and held power for a bit over a year. By early 1965 it was clear that Khanh did not want a long war against the Viet Cong, fought with American troops, but would prefer a settlement with the Viet Cong and the Buddhists--the kind of settlement President Kennedy had helped bring about in Laos in 1961-2. President Johnson, however, was determined to defeat the VC, and Ambassador Maxwell Taylor determined that Khanh had to go to make the new war possible. After a brief interlude of weak civilian rule, Generals Ky and Thieu took over in mid-1965 enabling the US to take over the war. At no time, however, did any Vietnamese leadership actually ask for the intervention of more than 100,000 American troops. It is not clear at this time whether Karzai actually signed on to the surge in Afghanistan, and it is possible that he has become so obstreperous because in fact he did not.

The Timescarried another story yesterday about a speech Karzai made on Thursday. In that speech, Karzai claimed that any election fraud last year had been carried out by westerners, not by his government. (I couldn't help remembering how Diem told a visiting American, after Nhu's secret police beat up some American reporters covering a Buddhist demonstration, that the reporters had started the fight.) "In his speech on Thursday, which was later broadcast on television," wrote Peter Baker, "Mr. Karzai rejected allegations that his allies were involved in widespread fraud in the election last year that awarded him a second term as president, and pointed the finger instead at the West, naming particular United Nations and European Union officials.

“'There is no doubt that the fraud was very widespread,' Mr. Karzai said, 'but this fraud was not committed by Afghans, it was committed by foreigners.' As for American, British and other NATO troops now fighting the anti-government Taliban insurgents, Mr. Karzai said 'there is a thin curtain between invasion and cooperation-assistance.'"

That was enough, apparently, to send the telephone wires a-buzzing between Washington and Kabul, and the next day, Karzai backtracked, claiming that he was attacking the western media, not the NATO governments who are trying to keep him in power.

Today's story is equally troubling--from the other point of view. It deals with the aftermath of the American operation of the Marja district, the operation that kicked off the surge. US forces hoped to win the loyalty of the people to the Afghan government by promptly compensating them for any property damage and putting them to work, but the Taliban among them--who remain very difficult to identify--have successfully intimidated many of the people and stopped them from cooperating with us at all. As the story explains, the US forces have managed to keep some Afghans on their side, but many have defected, and some of the cash we are handing out (at the rate of $150,000 per week) is finding its way to the Taliban, whose local governor met with local elites last week to warn them against cooperating with the Americans. The Viet Cong countered many pacification efforts in the same way.

The battle over health care and the coming battle over the regulation of the big banks have moved Afghanistan and Iraq (where interesting developments are also taking place) off center stage. That, in my opinion, is as it should be: neither country matters nearly as much to us as the need to get our own house in order. Yet both conflicts--and now, especially, Afghanistan--drain much-needed resources without, it seems, doing much to advance our broader goals. There is no reason for the Obama Administration to give the same significance to Afghanistan that LBJ gave to Vietnam in 1964-5. If Karzai wants peace with the Taliban, I hope we let him have it.

About Me

Since 1976 I have been a historian of international and domestic politics, as well as an authority on some of the more famous criminal cases in American history. For the past eight years I have been using this space to comment on current events. Links to my books, including, The Road to Dallas: The Assassination of John F. Kennedy (2008), appear above, at the top right corner of this page.. Simply click to learn more about them or to order them.
The email circulating widely attributed to me comparing President Obama to Adolf Hitler is a forgery: see snopes.com/politics/soapbox/proportions.asp.
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